The United Kingdom, Germany, and France have created a new payments system to allow European businesses to trade with Iran without falling foul of U.S. sanctions.

The special purpose vehicle (SPV), called the Instrument for Supporting Trade Exchanges (INSTEX), is meant to enable companies to continue trade with Iran—though presently only for those food, pharmaceutical and medical products which are not subject to sanctions.

In a joint statement, the “E3” foreign ministers—the U.K.’s Jeremy Hunt, France’s Jean-Yves Le Drian, and Germany’s Heiko Maas—say INSTEX will function “under the highest international standards” with regards to anti-money laundering, combating the financing of terrorism (AML/CFT), and EU and UN sanctions compliance.

The E3 expects Iran to “swiftly” implement all elements of its action plan and will also work with the Iranian government to create the necessary counterpart measures to make the SPV operational. No timeline, however, has been specified.

“It is not going to have any immediate impact until the corresponding mechanism is set up in Iran—whenever that might be—and companies, however many there may be, begin to register to use it.”

Lynne Moss, Senior Associate, Burness Paull

In the long term, INSTEX will be open to companies from third countries that wish to trade with Iran. China has already expressed an interest, and the invitation could be tempting to Russian companies, too—a move that is unlikely to please the United States.

The U.S. State Department has said Washington does not expect the SPV to affect its “maximum economic pressure” campaign against Tehran. It has also restated that the official U.S. line is that sanctionable activity with Iran risks “severe consequences,” and companies “could lose access to the U.S. financial system and the ability to do business with the United States or U.S. companies.”

While helping to maintain trade links, INSTEX—which is based in Paris and managed by a German banker—is also meant to keep alive the 2015 Iran nuclear deal. Under the Joint Comprehensive Plan of Action (JCPOA) agreed by the United States, United Kingdom, France, China, Russia, and Germany, Tehran agreed to limit its nuclear activity in return for the economic benefits of western sanctions being lifted.

Even before entering the White House, President Trump had derided the deal over fears that Iran might still have been capable of developing a nuclear weapons programme and vowed to pull the U.S. out of it. He duly did so last August and announced full sanctions would take effect from November 2018.

The reimposition prompted the European Union to take retaliatory action and impose a “blocking statute” to nullify any potential U.S. legal action against European firms while also enabling EU-based firms to recover damages resulting from the U.S. sanctions by suing the Trump administration in national courts of EU member states.

The blocking statute, however, also effectively bans EU businesses from complying with U.S. sanctions. Firms that decide they want to follow the Washington directive can only do so after gaining permission from the European Commission first—if they don’t, companies face the risk of being sued by EU member states.

So far, no European company has been punished despite several big names—French carmaker Renault, German state-owned rail operator Deutsche Bahn, and French oil firm Total—saying they are abandoning their Iranian investment plans.

Lawyers say businesses are more likely to follow Washington’s lead given the United States’ stronger record of enforcement on sanctions issues and—more practically—because Iran is a small market. The difficulties involved in trying to get appropriate insurance cover and banking facilities might also make the exercise too prohibitive to follow EU law.

Lynne Moss, senior associate at law firm Burness Paull, says the creation of the SPV “may be a step in the right direction” in providing the necessary financial mechanism companies need to continue trade in the Middle Eastern country.

She adds, however, that “it is not going to have any immediate impact until the corresponding mechanism is set up in Iran—whenever that might be—and companies, however many there may be, begin to register to use it.”